Subjectivism and the Objectivity of Analysis in Economics and Political Economy

1. Subjectivism and the Objectivity of Analysis in Economics and Political Economy Peter J. Boettke Econ 828/Fall 2004 8 November

2. Basic Point • Costs and Benefits are known to the individual decision maker and only at the moment of decision. • Context matters in decision making because the context of choice determines the structure of incentives faced and the trade offs that must be weighed. • Economic critique of policy choice must be limited to means/ends analysis. • Political economy possesses relevance only to the extent that economic analysis can be “scientific” in the sense of being ends-independent.

3. Buchanan’s contribution to economics and political economy • Economics is a “science”, but it is a “philosophical science”, and the strictures against scientism offered by Knight and Hayek should be heeded. • Economics is about choice and processes of adjustment, not states of rest. Equilibrium models are only useful when we recognize their limits. • Economics is about exchange, not about maximizing. Exchange relationships and arbitrage activity should be the central focus of market theory. • Economic is about individual actors, not collective entities. Only individuals choose. • Economics is about a game played within rules. • Economics cannot be studied properly outside of politics. The choices among different rules of the game cannot be ignored. • The most important function of economics as a discipline is its didactic role in explaining the principles of spontaneous order so that citizens can become informed participants in the democratic process. • Economics is elementary.

4. Some “Archeology of Knowledge” with respect to these 8 propositions of Buchanan’s • Frank Knight’s teaching • Real Cost vs. Alternative Cost • Marshall – Principles, 1890, p. 290 • We might as reasonably dispute whether it is the upper or the lower blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production. It is true that when one blade is held still, and the cutting is effected by moving the other, we may say with careless brevity that the cutting is done by the second; but the statement is not strictly accurate, and is to be excused only so long as it claims to be merely a popular and not a strictly scientific account of what happens. • Knight – A Suggesting for Simplifying the Statement of the General Theory of Price, JPE (1928), p. 359. • If costs are stated in terms of alternative commodities and all reference either to "sacrifice" or "outlays" simply omitted, we retain the scientific content of cost of production theory while side-tracking the sources of a century and a half of controversy. • Philip Wicksteed and The Common-Sense of Political Economy • The only sense, then, in which cost of production can affect the value of one thing, is the sense in which it is itself the value of another thing. Thus, what has been variously termed "utility", "ophelimity", or "desiredness", is the sole and ultimate determinant of all exchange values. • The Burden of the Public Debt Debate • We owe it to ourselves --- Functional Finance • The Subjectivist Economics of the Austrian School • “Mises and his followers have been too prone to accept the splendid isolation of arrogant eccentrics to divorce their teaching too sharply from mainstream interests, and too eager to launch into polemic: epistemological, methodological, ideological.” Buchanan 1973, p. 11. • The LSE Opportunity Cost tradition • Common Sense tradition and the practical task of the business man • “to accept fully the implications of the theory of opportunity cost that is implicit in these essays (The LSE Essays on Cost) requires the modern economist to throw overboard too much of his invested intellectual capital.” Buchanan 1973, p. 13.

5. The Nature and Significance of Opportunity Costs • Cost must be rendered in utility dimension and not commodity, and cost is best understood as the alternatives that are foregone in making a decision to pursue one path and not the other. • Costs are borne exclusively by the decision-maker; it is not possible for cost to be shifted to or imposed on others. • Costs are subjective, they exist in the mind of the decision maker and nowhere else. • Cost is based on anticipation; forward looking. • Costs can never be realized because of the fact of choice itself – that which is given up cannot be enjoyed. • Costs cannot be measured by someone other than the decision-maker because there is no way that subjective experience can be directly observed. • Costs are dated at the moment of decision or choice

6. What are the Implications of all of this? “The implications of all of this for modern welfare economics could scarcely be underestimated. My argument suggests that almost all of this subdiscipline has been based on simple methodological confusion. It has converted predictive propositions into allocative norms which have then been used to make policy proposals. … In one sense it might be said that the neoclassical economist has succumbed to the temptation to make his whole theory more general than its methodology warrants.” Cost and Choice, p. 41.

7. Some Examples of Economists as Social Engineers Guided by Welfare Economics • Debate Over Market Socialism • Costs without Markets (Chapter 6) • Keynesian Demand Management • Pretense of knowledge and pieces on the chess board (Chapter 4) • Cost Benefit Analysis • Pigovian Welfare Economics (Chapter 5)

8. Why Subjectivism? • Buchanan’s critique • Philosophically sound, but scientifically empty • Predictive component is necessary if we are to have science • Kirzner’s Defense • Economics is value-free and thus scientific to the extent, and only to that extent, that it is consistently subjectivist. • Means/ends analysis

9. Subjectivism and Buchanan • Rather, than viewing his work as schizophrenic (e.g., when men are rats vs. when men are human actors), we can see how consistent subjectivism constraints economics in terms of policy attempting to control behavior, and instead focuses on the rules of the games which provide an environment within which individuals choose.